The UK economy risks a jobless recovery from the coronavirus, with surging gross domestic product and lingering unemployment, a policy maker at the Bank of England said.
Michael Saunders, a member of the central bank’s Monetary Policy Committee, said the pandemic has gone on longer than anticipated and is hurting the finances of businesses and households.
“Strong quarterly growth rates that leave GDP well below its pre-Covid level and unemployment relatively high are not a boom,” Saunders said in a video conference in London on Thursday. “As time goes on, corporate balance sheets especially among small firms are steadily getting worse. The longer the crisis goes on, the greater the risk of long-term scarring effects that will weigh on demand subsequently.”
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The remarks indicate divisions at the central bank about the strength of the recovery and confirm some of the concerns raised by the Resolution Foundation, which hosted the event. Bank of England Chief Economist Andy Haldane expects a sharp recovery in the second half of the year that will absorb workers out of a job because of the crisis. That contrasts with rising alarm about the damage a third national lockdown is doing to huge parts of the economy.
The Resolution Foundation warned that 2.6 million people in the U.K., or 8% of workers, expect to lose their jobs in the next three months. Its analysis found about 2 million people had been unemployed or on furlough for the past six months, a length of time that leaves them at higher risk.
A separate report from the British Chambers of Commerce found a quarter of the 1,100 businesses polled planning job cuts if government support programs end as planned. Saunders said it’s possible to see a benign outlook for the UK economy, where demand recovers quickly.
“There is a less benign one in which rising unemployment itself weighs on spending because fears of job losses make people anxious — keen to ensure their own household budget will be OK — and firms fearing weak demand also don’t hire as much,” Saunders said.
Prime Minister Boris Johnson hopes a rapid vaccination program will allow shops, restaurants and bars to reopen by the summer, returning most of those unemployed to work.
“While the U.K.’s economic prospects are finally looking up, job insecurity remains high, particularly among those who have spent long periods not working, or who are currently furloughed,” said Nye Cominetti, senior economist at the Resolution Foundation.
Those comments help feed a debate about how aggressively Chancellor of Exchequer Rishi Sunak should support workers through the pandemic in his budget statement on March 3. The central bank is forecasting unemployment will rise from 5% currently to 7.8% by the third quarter, leaving the total number of jobless at around 2.7 million.
Resolution called on the Treasury to extend furlough beyond the end of Covid restrictions. Earlier this week, the Institute for Fiscal Studies also recommended Sunak taper back the program, which is current due to expire in April, giving companies an incentive to adjust to the new economic reality.
“In setting policy, our key focus is to try to give businesses and households confidence that demand will recover strongly,” Saunders said. “That’s the best way to ensure that if unemployment does go up as the furlough scheme comes to an end, then the rise is short-lived and we get back to full employment as quickly as possible.”
By Lucy Meakin
Source: Bloomberg
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